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Tuesday, April 01, 2008

"Playing Politics at the Corner of Wall and Main"

John Berry defends the Fed's actions in the Bear Stearns case:

Playing Politics at the Corner of Wall and Main: John M. Berry, by John M. Berry, Bloomberg: Some politicians seem determined to undermine the Federal Reserve's credibility by questioning whether the Fed should have acted to ward off the failure of Bear Stearns Cos.

Would they have preferred a succession of failures by major financial institutions that might have precipitated an economic disaster of soul-searing proportions? ...

There was no systemic failure a couple of weeks ago because a deal was struck, with the help of the Fed, for JPMorgan Chase & Co. to acquire Bear Stearns. Had Bear Stearns gone belly up, maybe that wouldn't have brought down any other institution.

Still, the risk was there, and the two U.S. Senate committees that have announced investigations of the Bear Stearns sale should keep that in mind.

In most of the discussion about the deal ... it has been labeled a bail out of Wall Street's wealthy.

Senator Max Baucus of Montana, chairman of the Senate Finance Committee, didn't use those words ... when he announced... ''Economic times are tight on Main Street as well as Wall Street, and we have a responsibility to all taxpayers to review the details of this deal,'' Baucus said.

Such a review is appropriate. What isn't appropriate is continuing to play populist politics by pretending that the interests of Main Street and Wall Street aren't aligned when the stability of the financial system is at stake.

''With jurisdiction over federal debt, it's the Finance Committee's responsibility to pin down just how the government decided to front $30 billion in taxpayer dollars for the Bear Stearns deal...,'' Baucus said.

The ranking Republican on the committee, Senator Chuck Grassley of Iowa, agreed with Baucus's emphasis. ... ''Congress has a responsibility to look at whether the taxpayers will lose money here.''

Talk about penny-wise and pound-foolish. If the deal was necessary to avoid a market panic, the cost would be more than worth it even if every cent went down the drain.

Getting in on the act was Democratic Senator Chris Dodd of Connecticut, chairman of the Senate Banking Committee, who said ... that he would convene a separate hearing on the Bear Stearns deal ... Dodd... also asks about the implications for future regulation of ''entities'' that get support from the Fed. ...

[I]f you want to look at the Bear Stearns deal in terms of the risk to taxpayers, the odds really are better that the Fed will make money than lose it.

The ... collateral for the loan ... had already been marked down in a very illiquid market and ... they won't necessarily have to be sold for years to come. ...

''We do not subscribe to the view that this arrangement is necessarily at taxpayers' expense,'' said Ray Stone of Stone & McCarthy Research Associates. ''Indeed, it is quite possible that the Fed actually makes money, and earns a larger than otherwise surplus to be turned over to the Treasury.''

More to the point, Stone said, the Fed did this to maintain the soundness of the financial system, not to make money.

Perhaps if the Bear Stearns crisis hadn't erupted almost overnight, some more elegant ways might have been found to deal with it. That's the nature of financial crises though, and a lot of carping about risks to taxpayers isn't going to do anyone any good, except perhaps politicians who want to beat the populist drums.

    Posted by on Tuesday, April 1, 2008 at 12:19 AM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (11)

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